If you have tuned into the stock market during the last few weeks, you have three questions about the markets. First, will the Federal Reserve raise the discount rate during their September 16-17 meeting, thus affecting an increase in all interest rates? Second, will China’s economic slowdown and sickly stock market infect developed markets? Third, how will yesterday’s payroll number influence the U.S. economy? And finally, what do these data points mean for quarterly corporate earnings and the stock market?

Volatility is back!

These preoccupations have whipsawed the stock markets with intense volatility–after an extended benign period ending in December 2014. While the musings of Chinese officials or Federal Reserve bankers are mysterious, I can comment on the market. The VIX index, also known as the “fear index” due to its spikes when investors start selling stocks, is back with a vengeance as attention toggles from good news such as a reported US GDP number of 3.7%, to bad news such as the reported weakness in the Chinese manufacturing sector.

On August 24th, the VIX surged to above 40 (15-18 is normal), a level not seen since 2011 when Congressional inaction over the debt ceiling riveted the world. Yesterday the VIX surged to 28, when the Bureau of Labor Statistics posted August jobs numbers showing an increase in wages (by .3%, good), an increase in jobs (by 173,000, less than expected but still positive), longer work weeks, and an unemployment rate dropping to 5.1%, all good. I would argue that the participation rate, at 62.5% is still too low compared to levels of 67% pre Global Financial Crisis. The take away, however, was bad: the Fed will now have reason to raise rates.

Putting all of this data together has created a toxic brew that has finally seeped into investor consciousness. As reflected in indices such as Standard & Poors (S&P) 500, many investors sold suddenly. Up until recently, the market had been mostly range-bound for most of 2015, varying within 2%. Now, year to date, the S&P has fallen almost 6% total return, after you include dividends. Compared to this time last year, the market is down roughly 2%. What to do?

Sector Performance Enlightens

I always find it helpful to look at the S&P GICS sectors for market clues. It is a scary market and investors have responded by rewarding consumer discretionary stocks–the sector with the least overseas earnings–that is also benefitting from an improving economy and more confidant consumers. Year-to-date sector performance is shown below, including dividends.

S&P Sector Performance 12/31/14-9/4/15
Consumer Discretionary 2.64%
Health Care 0.44%
Telecom -2.66
Consumer Staples -3.37
Information Technology -4.62
Financials -7.98
Industrials -9.95
Utilities -12.06
Materials -12.61
Energy -19.2


Total return numbers are from Bloomberg, 9/4/15

The worst performing sectors, Materials, hit by the Chinese decreased appetite for commodities, and Energy, down due to more supply than a slowing world economy can consume. Yesterday’s drop in Utilities, which pay high dividends, was seen as a technical indicator of a September hike. (Bloomberg 9/4/15)

Over the next few months I will look at the sectors in depth and keep you up to date at www.theHuffmanBroadsheet.com


Print Friendly, PDF & Email